February - 2008 MARKET UPDATE Equity ECONOMY Nifty declined by 2638 points (-13.0%) and 1001 points (-16.31%) to India’s cumulative fiscal deficit during Apr - Dec’07 reduced close at 17,649 and 5,137 respectively Volumes dropped drastically tremendously to 51.4% of the budgeted target compared to 63.8% following 10% drop in key indices within minutes of opening on for the same period last year. Sharp rise in Tax and Non Tax revenues January 22. Thereafter, daily average volumes dropped over 35% and reduction of non plan expenditure on revenue account are the in cash and 30% in Futures as retail investors were trapped by key drivers of the fall in this month’s fiscal deficit. Income Tax system driven position square up on January 22. Sensex and Nifty collection has shown phenomenal growth at 42.7% this fiscal had respectively lost 13% and 16% in January. Mid and small cap compared with 27% last fiscal. The Industrial Production fell to 5.3% indices had respectively lost over 20% and 24%, virtually loosing in November 2007 due to lower growth in Manufacturing. the entire gains of the previous 2 months. This sharp fall in Indian WPI inflation rate for the week ending 12 January 2008 stood stocks saw key indices bridge over half of the gap it posted against 3.83%, higher from last week due to rise in prices of non food articles peers since November under de-coupling euphoria. In fact, the and manufactured products despite decline in food articles prices. The market commenced the month on a firm note and both the Sensex Wholesale Price Index (WPI) stood at 216.7. The YTD average WPI and Nifty had peaked at their best on January 8. Negative sentiment inflation for FY08 is 4.68%, which is lower than average inflation of set in on January 16 and its worst was seen on January 22. FIIs 4.89% for the same period in FY07. were keen sellers in cash, throughout the month, and they withdrew Foreign exchange reserves increased to $ 288.32 bn during the over $4.2 billion in cash the largest ever in a month. But in futures week ending 25 January 2008. they improved their participation by $2.4 billion. Domestic institutions In the wake of weakening economic outlook and increasing were keen buyers, particularly after the sharp fall, and mutual downside risks to growth, Federal Reserve has lowered its benchmark funds made net fresh investment of over $1.4 billion, the largest interest rate in an emergency move. The central bank cut the target since May 2006 when the market made the sharpest correction in fed funds rate by 75bps to 3.5% from 4.25% and then by another the current bull phase. Liquidity continued to be the key concern 50bps to 3.00%. RBI however has focused on inflation and maintained and the reduced flow of liquidity into the system in developed a status quo in the monetary policy last month. markets from respective central banks, unlike during the previous CORPORATE month when they pumped unlimited liquidity, was the key negative The Q3 results announced shows divergent performance trends factor for markets across the board. India was no exception to this both inter and intra sectors. While financials have reported a global trend. It was a sharp correction, after two months of November bottomline growth of 48% YoY, healthcare and utilities have reported and December 2007. Top gaining sectors of the previous two months a 2-5% YoY decline in earnings. Given the current investor mood of were the worst affected this month. Consumer Durables, Reality, low tolerance to bad news companies, stocks only with relatively strong Metals Oil & Gas indices have all lost over 20% this month. Banking earnings visibility will drive the performance of the portfolios. was the least affected, on the back of improved earnings in third In 3QFY08, revenue growth for BSE-500 was 19%, and earnings quarter, and it dropped by only 6%. growth was 15%. The topline growth leaders were financials, telecom, MARKET OUTLOOK software and capital goods. Utilities and healthcare were the big The Indian markets have seen huge volatility in line with the laggards. In 3QFY08, revenue growth for BSE-500 was 19%, and various global markets. At 17464 (as of 31st Jan’08), the markets earnings growth was 15%. As new capacities come on stream over looks attractive but we should expect a certain amount of volatility the next 6-12 months, better operating leverage should drive margin in the near term. Post the Q3 results, the next event to look forward improvement. to is the Union Budget. We strongly believe that most of the bad STOCK MARKET news – including the scare of global slowdown - has been discounted January witnessed the peak of key stock indices and the largest by the markets. From the current levels our view is that the markets single month fall in India. Volatility was extremely high and a 1000 have a 5% downside and 25% upside over the next one year and as point movement in Sensex was almost daily affair during the third such risk reward is clearly in favour of investment into equities. week. In a single day, Sensex moved over 2000 points. Sensex and (Source: Bloomberg) Derivatives The Sensex made an all-time high of 21206 in the month of January and corrected nearly 6000 points before closing the month at 17648, 13% down from its 2007 close. The cost-of-carry at the beginning of the month was very high and the fund was fully deployed into arbitrage. However, the correction in the indices lead to a panic-selling all over, especially in the F&O segment because of huge leveraged positions, MTM money calls from the brokers and increased volatility margins by the exchanges. As a result most of the stock futures were trading at huge discounts to their cash market prices. The scheme took advantage of this and reversed upto 35-40% of its arbitrage positions at good profits. Due to the uncertainty in the domestic as well as global markets, the cost-of-carry for the February series is on the lower side. We may see a bit lower returns in the next month, but it’s always seen in the past that a few good months and a few bad months average out to yield handsome annualized tax free returns for the whole year. The total market-wide open interest has decreased by more than 50% - from more than Rs. 130,000 crs in mid-Jan to Rs 60,000 crs approx. However, the steep correction in the markets has provided a good opportunity to our arbitrage schemes to book huge profits leading to rewarding the investors in the New Year 2008 with a handsome dividend declaration in both our arbitrage schemes. Giving our family of investors many reasons to celebrate 1 MARKET UPDATE Debt Current Last M-o-M Indicators Month month Variation Forex Reserves* USD Bln 288.31 272.72 15.59 Credit Off take* -Rs Crs 2,127,664 2,091,400 36264 Credit Deposit Ratio * 7,150.00 71.40 WPI Inflation*(%) 3.93% 3.45% 0.0048 10-Year Yield - India* (%) 7.55% 7.79% -0.0024 10-year Yield - USA* (%) 3.92% 4.06% -0.0014 Exchange Rate* USD/INR 39.37 39.41 -0.04 Brent Crude per/bbl* 92.56 93.89 -1.33 Reverse Repo-Daily Avg Rs Crs 16,225.00 536.00 15,689.00 Repo Average-Daily Avg Rs Crs 242.00 5,564.00 (5,322.00) * Data Reported as on month-end, Source RBI, WSS & Bloomberg. Government bond yields continued to rally during the article prices and incomplete pass-through of crude oil month on expectations of easing of interest rates by RBI prices is likely to exert upward pressure on inflation in in the monetary policy. Easing of global interest rates the medium term. RBI has set a target of headline inflation and comfortable liquidity position led to sustained buying at 4.00%-4.50% for the FY 2008, with an objective to in the government securities market. Soft statements bring it down to around 3.00% in the medium term. WPI from the RBI governor before the release of the monetary Inflation for the month of January 2008 stood at 3.95% policy and Finance minister asking banks to cut interest as compared to 3.50% in the previous month on account rates by 50 basis points further fuelled hopes of a cut in of sharp rise in fuel index. Fuel index rose from 330.2 in interest rates by the RBI. Surprise and a sharp cut of 75 the last month to 334. Primary articles index rose from basis points in US interest rates before the scheduled 222.1 to 222.8 and manufacturing index from 188.5 to meet led to frenzied buying in the government securities 188.9. Going forward in the month of January 08, market, as the 10 year benchmark yield touched a low headline inflation is expected to remain in the band of of 7.36%. The US Federal Reserve again cut the key 3.90%-4.25%. Government is also expected to take a interest rates by another 50 basis points to 3.00% at the decision on domestic fuel prices in wake higher scheduled meeting held on 30th Jan 2008. Sustained international crude prices. (Source: Bloomberg) rally was witnessed across the curve with the maximum Factor: Liquidity rally in the long end bonds.